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Crypto-assets and decentralized finance through a financial stability lens

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Re: Crypto-assets and decentralized finance through a financial stability lens

#31

Post by lern_too_spel »

where_to_inc wrote: post #19
scoopertrooper wrote: post #9

Earlier quoted context omitted.

Quite a few allegations there. It seems like the simplest way to settle this discussion would be to point out a few practical applications of crypto that provide real utility to the finance system.

I can’t speak to other cryptocurrencies. But at least re: Bitcoin: 1. International settlements of any sum of money (small to large) in 10-20 minutes instead of days 2. Markedly lower money transfer fees compared wire transfer or ACH 3. Ability to be one’s own bank if so desired, avoiding government bank account pillaging (Cyprus, Argentina, many more) 4. Ability to send money anywhere (try paying your staff in Russi…

1-4 boil down to making illegal payments easy. This is not a technological advantage but a regulatory one. As soon as governments regulate Bitcoin the way they regulate banks, this "advantage" vanishes.

5 confuses theoretical maximum throughput with actual throughput. The theoretical maximum throughput of credit card networks is far higher than the actual, and the actual throughput of lightning is far lower than theoretical. Since only three wallets can join the lightning network per second (if all Bitcoin transactions were setting up lightning channels), its utility for actual transactions between arbitrary wallets remains theoretical as well.

6 confuses the value of Bitcoin with its supply. The value quickly approaches 0 when regulation takes away advantages 1-4.

Re: Crypto-assets and decentralized finance through a financial stability lens

#32

Post by ayngg »

IncRnd wrote: post #30
kwertyops wrote: post #18

Earlier quoted context omitted.

I never understood this analogy, and now I’ve seen it enough to finally ask in good faith —- If tulips bulbs were of a limited supply, (relatively) infinitely divisible, (relatively) impossible to forge, and could be transferred anywhere in the world, in any amount, (relatively) instantaneously… Would it really be that crazy to imagine that they may have kept significantly more value? Or be used as a kind of currency…

It's a well-known historical period. Look up "tulip mania". It's not a flattering comparison for crypto.

It is well known, but it is not well understood, especially by those who use it as a comparison for crypto. The popular narrative is akin to a sensationalized tale which is contested by modern research on the subject. There is a misconception of the scope and effect of it, when in reality it was localized to a small number of wealthy merchants engaging in speculation on luxury goods with minimal economic damage overall as opposed to the popular narrative that it was a society wide mania which caused financial ruin for many. Basically the only thing they have in common is that they occurred in wealthy societies.

Re: Crypto-assets and decentralized finance through a financial stability lens

#33

Post by game-of-throws »

dogcomplex wrote: post #26
kwertyops wrote: post #18

Earlier quoted context omitted.

I never understood this analogy, and now I’ve seen it enough to finally ask in good faith —- If tulips bulbs were of a limited supply, (relatively) infinitely divisible, (relatively) impossible to forge, and could be transferred anywhere in the world, in any amount, (relatively) instantaneously… Would it really be that crazy to imagine that they may have kept significantly more value? Or be used as a kind of currency…

"limited supply" True until another batch of cryptotulip bulbs is released under a new name with slightly different properties and it joins the cryptotulip ecosystem. Any one species of cryptotulip might be a limited supply, but on the whole it's a very inflationary ecosystem, with trust on which is the "true currency" extremely malleable and divided. Even the "original" BitTulip has as many haters expecting its inev…

> How does that consensus happen in a decentralized environment, when clearly it's not happening in this crypto bubble?

The earth is a decentralized environment in which USD, EUR, GBP, and JPY float against each other, and their value at any time is determined by market confidence. You shouldn't expect 100% global consensus on a particular cryptocurrency any more than you expect 100% global consensus on (say) USD or EUR.

If I print a stack of ThrowBills, would you buy them for $1? If I mint ThrowCoins, would you buy them for 1 BTC? If you decline my offer, then you understand that value does not come for free (crypto or not), and merely inventing a new tulip does not inflate existing tulips -- it competes with them.

Re: Crypto-assets and decentralized finance through a financial stability lens

#34

Post by tyre »

atwood22 wrote: post #16
wmf wrote: post #11

Earlier quoted context omitted.

I did the same with TradFi. There's no additional utility.

I think the utility is the medium itself. Your TradFi loan was delivered to you using a financial system maintained by thousands of highly specialized bankers and engineers leveraging billions of dollars in infrastructure. A DeFi loan is delivered to you via a smart contract that runs on a generic financial computing platform known as a blockchain. Even if the only thing you can do with a blockchain is implement exis…

The billions of dollars of infrastructure doesn’t exist for no reason! The regulations and difficulty of starting a bank or mortgage company aren’t there for the hell of it!

Name the specific parts of mortgages that you believe should not exist and that DeFi eliminates.

Should we not do income checks on homebuyers to ensure that they can reasonably be able to pay the debt?

If they can’t pay their debt, what happens to the home? Is it collectively owned by the smart contract? How does that work? Where does the deed go?

Speaking of the deed, what if there’s a bug in the contract? Are we really going to pretend that these contracts have the force of law and a house can be stolen because someone wrote a bug? Or are we accepting that we can override the contract and none of the benefits of “smart contracts run[ning] forever” are real?

How should a smart contract value a home, to determine if the loan is adequately backed? If the buyer wants a $1m mortgage on what is actually a $10k plot of land, they can default and the contract (?) gets (??) an asset two orders of magnitude less than the check it wrote.

Hand-waving “well every real estate transaction will also be on the blockchain with perfect metadata so AI can make that decision” is not an answer.

How does a DeFi platform prevent money laundering? Should it not? This requires people! And regulations!

This is a tiny slice.

But we cannot pretend that any of this makes sense without thinking more than one layer deep. Which is really the problem.

Re: Crypto-assets and decentralized finance through a financial stability lens

#35

Post by atwood22 »

tyre wrote: post #34
atwood22 wrote: post #16

Earlier quoted context omitted.

I think the utility is the medium itself. Your TradFi loan was delivered to you using a financial system maintained by thousands of highly specialized bankers and engineers leveraging billions of dollars in infrastructure. A DeFi loan is delivered to you via a smart contract that runs on a generic financial computing platform known as a blockchain. Even if the only thing you can do with a blockchain is implement exis…

The billions of dollars of infrastructure doesn’t exist for no reason! The regulations and difficulty of starting a bank or mortgage company aren’t there for the hell of it! Name the specific parts of mortgages that you believe should not exist and that DeFi eliminates. Should we not do income checks on homebuyers to ensure that they can reasonably be able to pay the debt? If they can’t pay their debt, what happens t…

I think you're entirely missing my point. You're going off on a tangent about mortgages, regulations, and titles. That's at a much higher level than what I'm talking about. To use load balancers as an example, you're talking about L7 stuff, I'm talking about L3 stuff.

Let's use your example of mortgages. When you get a mortgage, your lender wires money to the seller. How do they do that? They use Fedwire, which is a system maintained by the Federal Reserve for banking transfers. Such a system can be totally replaced by a blockchain. If you replaced Fedwire with a blockchain, you wouldn't remove the regulatory and legal requirements, you would just replace a legacy technical system with something that is more powerful. A blockchain can do everything Fedwire can do, and a blockchain implements this functionality in a more generic fashion that allows for additional constructs, like smart contracts, to be added.

Following your mortgage a little further: most mortgages are not held by the bank. The was the main issue in the financial crisis in 2008. Banks don't hold mortgages, so they were very loose in who they lent to. Rather than hold on to the mortgages, the bank sends them to a clearing house that packages up the mortgages into a mortgage backed security. All of this infrastructure could be replaced by a smart contract.

A blockchain can be thought of as a generalization of a financial system (system here meaning the technical system, i.e. the nitty gritty details of how and when money is moved). This is a powerful generalization and can implement existing financial systems in a much more efficient manner. As an individual, I could implement a mortgage-backed security system. That type of productivity is not possible in our current financial system.

This does not mean that I'm advocating for some type of anarchistic hellscape where regulations fall by the wayside. You can still have the same set of regulations, but implement the underlying nuts and bolts financial system in a way that's more efficient, standardized, and democratic.

Re: Crypto-assets and decentralized finance through a financial stability lens

#36

Post by alisonkisk »

Animats wrote: post #17

Some good points: "... same risks that are all too familiar from traditional finance, such as leverage, settlement, opacity, and maturity and liquidity transformation." Yes. I've been making this point for years. It's mostly problems that are well known. It's just that the crypto crowd doesn't study financial history, so they get to repeat it. Although crypto has its own unique risks - it's really hard to secure cryp…

No post body was provided.

Re: Crypto-assets and decentralized finance through a financial stability lens

#37

Post by alisonkisk »

ETH_start wrote: post #27

Organizations like the Federal Reserve are incentivized to not look into their own role in producing financial instability. The GSE loan guarantee program is largely backstopped by the Federal Reserve. It underwrites $6 trillion worth of US mortgages, which is approximately 50% of the entire market. In 1999, the GSEs set out to increase liquidity in so-called under-served residential mortgage markets, and thereby red…

No post body was provided.

Re: Crypto-assets and decentralized finance through a financial stability lens

#38

Post by throwawaymaths »

ETH_start wrote: post #27

Organizations like the Federal Reserve are incentivized to not look into their own role in producing financial instability. The GSE loan guarantee program is largely backstopped by the Federal Reserve. It underwrites $6 trillion worth of US mortgages, which is approximately 50% of the entire market. In 1999, the GSEs set out to increase liquidity in so-called under-served residential mortgage markets, and thereby red…

> Attempts to artificially reduce instability can often have the opposite effect, by socializing the harmful effects of irresponsible risk taking, and thus creating moral hazard.

Can we put this in less technical jargon that describes what happens based on the structural system of how the feds actions make its way to economy as a whole?

Attempts to reduce instability create stability for wealthy class, like wall Street and bankers, while socializing the cost of maintaining stability by increasing the cost of living for everyone else, which most disproportionately hurts people on fixed incomes, and makes social welfare harder to provide by government and private charity alike.

Re: Crypto-assets and decentralized finance through a financial stability lens

#39

Post by ETH_start »

throwawaymaths wrote: post #38
ETH_start wrote: post #27

Organizations like the Federal Reserve are incentivized to not look into their own role in producing financial instability. The GSE loan guarantee program is largely backstopped by the Federal Reserve. It underwrites $6 trillion worth of US mortgages, which is approximately 50% of the entire market. In 1999, the GSEs set out to increase liquidity in so-called under-served residential mortgage markets, and thereby red…

> Attempts to artificially reduce instability can often have the opposite effect, by socializing the harmful effects of irresponsible risk taking, and thus creating moral hazard. Can we put this in less technical jargon that describes what happens based on the structural system of how the feds actions make its way to economy as a whole? Attempts to reduce instability create stability for wealthy class, like wall Stre…

>>Attempts to reduce instability create stability for wealthy class, like wall Street and bankers, while socializing the cost of maintaining stability by increasing the cost of living for everyone else,

Yes. The short term stabilization brought about by the socialization of losses and due diligence costs also degrades the weeding out process that instills long term discipline on financial institutions.

Re: Crypto-assets and decentralized finance through a financial stability lens

#40

Post by IncRnd »

ayngg wrote: post #32
IncRnd wrote: post #30

Earlier quoted context omitted.

It's a well-known historical period. Look up "tulip mania". It's not a flattering comparison for crypto.

It is well known, but it is not well understood, especially by those who use it as a comparison for crypto. The popular narrative is akin to a sensationalized tale which is contested by modern research on the subject. There is a misconception of the scope and effect of it, when in reality it was localized to a small number of wealthy merchants engaging in speculation on luxury goods with minimal economic damage overa…

The number of people who were in tulip mania isn't relevant. Yet, whenever this comparison occurs, people try to debunk a comparison that isn't being made - instead of looking at the actual comparison that is being made.
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